ACCT ch8-10

________ ratios measure the ability of a company to survive over a long period of time.

solvency

If the estimated useful life of equipment changes, then this change requires

that the amount of the periodic depreciation be changed in the current year and in future years.

What is the face value of a bond?

the amount of principle due at the maturity date

Which reason would force a company to retire a plant asset rather than sell it?

the asset has no ready market

A note receivable can be transferred ________ by endorsement.

to another party

A franchise is often associated with what other kind of intangible asset?

trade name

Why are short-term receivables listed after short-term investments on a classified balance sheet?

because short-term receivables are less liquid than short-term investments

If no gain or loss on disposal is recorded, then the ________ value of the plant asset equals its fair value at the date of sale.

book

If a company wants to reserve the right to purchase their issued bonds back from the bondholder, they should issue ________ bonds.

callable

What is the term for bonds that are subject to retirement at a stated dollar amount prior to maturity at the option of the issuer?

callable bonds

Lease liabilities

can be reported as either current or long-term.

Four companies each have a credit term period of 45 days. Based on each company's net credit sales and average net accounts receivable for 2022, which company is MOST successful at collecting their accounts receivable?

company 3

Which of the following processes best describes depreciation?

cost allocation

Amortization refers to the

cost allocation of an intangible asset

Return on assets is used to calculate the amount of ________ generated by each dollar

income; of assets.

Rights, privileges, and competitive advantages that result from ownership of long-lived assets without physical substance are called ________ assets.

intangible

If bonds sell at a discount, then the

interest expense recognized each year will be greater than the bond interest paid.

The accountants at Global Systems are preparing the balance sheet with liability information. Which of the following information about the company's liabilities should the accountants include in the notes to the financial statements?

interest rates

How is the return on assets ratio computed?

profit margin ratio multiplied by the asset turnover ratio

Sunshine Industries has a large fleet of delivery vehicles. Of the firm's fleet, 15 of the vehicles are fully depreciated, yet Sunshine continues to use them every day. In this situation, Sunshine will

realize a higher income if it delays the purchase of replacements

Which of the following should a merchandiser do at the point of sale?

recognize an accounts receivable

Bad debt expense is classified as ________ on a multiple-step income statement.

selling expense

Buyright Company allows the use of national credit cards. Which two functions are the responsibility of the credit card company?

setting credit limits and maintaining customer accounts

Pat's Garage installed a new parking lot. The paving cost $10,000 and the lights to illuminate the new parking area cost $5,000. These additions require that

$15,000 should be debited to land improvements.

Keck Industries is planning to issue $7 million in bonds with a six-year maturity date and an annual rate of 5.4 percent. How much will they pay in interest over the life of the bonds?

$2,268,000

Reynoso Manufacturing has a current ratio of 1.42:1 and current assets of $643 million. What are their current liabilities?

$452.8 million

Over the past 10 years, Northwood Pharmaceuticals spent several million dollars related to the research, development, and sale of a specific drug. Which of the following costs associated with the drug should Northwood amortize as an intangible asset?

$718,000 to defend the patent in an infringement suit

Carlton Company does not ring up sales taxes separately on the cash register. Total receipts for February amounted to $21,000. If the sales tax rate is 5%, what amount must be remitted to the state for February's sales taxes?

1,050

Justice Enterprises has current assets of $593 million and current liabilities of $316 million. What is their current ratio?

1.88:1

Corn Flake Corporation reported net income of $300,000. Interest expense was $40,000 and income taxes were $100,000. The times interest earned ratio was

11 times

Monroe Company has net credit sales of $126,545 for the most recent fiscal year. Beginning and ending accounts receivable were $12,905 and $10,062, respectively. Compute Monroe's accounts receivable turnover.

11 times

The financial statements of the Harrison Company report net sales of $200,000 and accounts receivable of $10,000 and $5,000 at the beginning of the year and end of year, respectively. What is the average collection period for accounts receivable in days?

13.7

Cormier Industries reported a net income of $6.7 billion, interest expense of $512 million, and income tax expense of $283 million in 2022. What is their times interest earned?

14.6 times

Olivas Recreation reported a net income of $3.2 billion, interest expense of $214 million, and income tax expense of $195 million in 2022. What is their times interest earned?

16.86

Companies can amortize a patent for a period that cannot exceed ________ years.

20

Hawley Enterprises has total assets of $387 million and total liabilities of $115 million. What is their debt to assets ratio?

30%

Hyperion Enterprises had asset turnover of .40 in 2022. If net assets were $678,000 at the beginning of the year and $895,000 at the end of the year, what were net sales for 2022?

314,600

Hamill Company purchased equipment on January 3rd, 2022, for $70,000. The equipment is expected to be used for four years and 12,000 hours (4,000 hours in the first year, 3,000 hours in year 2, and 2,500 per year for each of the last two years). Hamill hopes to sell the asset for $5,000 at the end of its useful life. Using the double-declining-balance method of depreciation, what amount of depreciation expense will Hamill report on the income statement for the year ended December 31st, 2022?

35000

On their 2022 balance sheet, Kohler Manufacturing reported $17 million in total liabilities and $39 million in total assets. In addition, they had $2.8 million in off-balance-sheet obligations. What is their adjusted debt to assets ratio if they take into account the off-balance-sheet obligations as both assets and liabilities?

47%

Which of the following will occur if a company shortens its collection period?

Accounts receivable turnover will increase

On July 1st, 2022, Weston Company places a new asset into service. The cost of the asset is $30,000 with an estimated 5-year life and $5,000 salvage value at the end of its useful life. What is the depreciation expense for 2023 if Weston Company uses the straight-line method of depreciation?

5,000

Baer Industries has total assets of $162 million and total liabilities of $83 million. What is their debt to assets ratio?

51%

Miller Corporation bought equipment on January 1st, 2022 .The equipment cost $100,000 and had an expected salvage value of $30,000. The life of the equipment was estimated to be 5 years. The depreciable cost of the equipment is

70,000

Onion Company, whose fiscal year ends on December 31st, purchased a vehicle for $41,000 on March 12, 2022. The vehicle's estimated useful life is five years, and it is expected to be driven 150,000 miles (20,000 miles in the first year and 32,500 for each of the remaining four years). Onion estimates the salvage value at $3,500. Using the units-of-activity method, what amount of depreciation expense will Onion Company record in year 3?

8,125

How much interest will a 120-day note receivable of $2,700 with an interest rate of 9.5% earn?

85.50

The financial statements of Baker Company report net sales of $500,000 and accounts receivable of $10,000 and $15,000 at the beginning of the year and end of year, respectively. What is the average collection period for accounts receivable in days?

9.1

________ are usually collected within 30 to 60 days, while __________ are collected over a longer time period and are accompanied by a formal instrument.

Accounts receivable, notes receivable

Which of the following statements regarding reporting receivables on the balance sheet is true?

Allowance for Doubtful Accounts is shown as a deduction from Accounts Receivable on the balance sheet.

When writing off an uncollectible account under the allowance method, ________ is credited, and ________ is debited.

Accounts Receivable; Allowance for Doubtful Accounts

Gemini Group ordered motor tune ups and oil changes on their entire fleet of company vehicles in the third quarter. How should this expense be recorded?

As a revenue expenditure.

Using the percentage-of-receivables basis, Continental Industries estimates it has total bad debts of $25,150. If Continental's trial balance shows an Allowance for Doubtful Accounts with a debit balance of $8,750, which of the following adjusting entries should the firm make?

Bad Debt Expense = Debit of $33,900; Allowance for Doubtful Accounts = Credit of $33,900

Which of the following statements is true?

Both the gross amount of receivables and the allowance for doubtful accounts should be reported.

How is the average collection period computed?

By dividing 365 days by the accounts receivable turnover ratio

Gopher Excavation, a calendar-year firm, purchased equipment on January 1st, 2018, for $175,000. The equipment had an estimated life of 10 years and no expected salvage value, and Gopher depreciated it using the straight-line method. On July 1st, 2022, Gopher sold the equipment for $120,000. How should Gopher record the sale on its balance sheet?

Cash = Debit of $120,000; Accumulated Depreciation—Equipment = Debit of $78,750; Equipment = Credit of $175,000; Gain on Disposal of Plant Assets = Credit of $23,750

Which of the following companies will record the highest interest expense each year? Assume all four companies have five-year bonds with a face value of $8 million and a 9.5% annual rate.

Company 1 sold their bonds at 94.

Which of the following companies is operating the most efficiently?

Company 2, with an asset turnover of 1.26

A potential bondholder is considering four companies for investment. Which company has the lowest likelihood of defaulting on their interest payments?

Company 4 has a times interest earned ratio of 14.3.

Which company has the lowest profitability?

Company 4, with a return on assets of 2.4%

A potential bondholder is considering four companies for investment. Which company has the highest likelihood of defaulting on their interest payments?

Company C has a times interest earned ratio of 6.4.

Eastman Mining estimates that they will need to spend $4.6 million in environmental cleanup to close one of their mines. Therefore, they report this cost in their financial statements. This is an example of reporting a(n)

Contingency

Which of the following statements is correct?

The cost of a limited-life intangible asset must be amortized over the period of its useful life.

________ are said to be at "arm's length," while ________ are to be reported separately in the financial statements.

Credit sales to customers; loans to company officers

Foremost Manufacturing wants to buy $50,000 of sheet metal from Ore Industries on credit. Before agreeing to the sale, Ore decides to evaluate Foremost's financial status. Of the following potential findings, which would lead Ore to refuse to sell the metal on credit?

Foremost's current assets are $450,000 and its current liabilities are $475,000.

Jason is preparing the liabilities section of the balance sheet for his company. How should Jason organize this section?

He should list current liabilities in the first section and long-term liabilities in the second section.

How would intangible assets with limited lives compare to those with indefinite lives?

Intangible assets with limited lives would have their cost allocated over the useful life while those with indefinite lives would not.

What happens if the amount of uncollectible accounts expense is overstated at year end?

Net Accounts Receivable will be understated.

Which of the following statements is correct?

The cost of a patent should be amortized over its legal life or useful life, whichever is shorter.

The net amount expected to be received in cash from receivables is termed the cash ________ value

Realizable

Which action should a company take in order to minimize losses due to bad debts?

Require potential customers to provide bank guarantees.

Under which of the following circumstances should a company accrue for the loss related to an unsettled lawsuit?

The company can determine a reasonable estimate of the expected loss and it is probable they will lose the lawsuit.

Which of the following statements regarding the financial statement presentation of receivables is true?

The gross amount of receivables less the allowance for doubtful receivables is equal to the net receivables

Why should product warranties be disclosed in the financial reports?

They are contingencies.

Wagner Enterprises and Stone Services both disposed of an old asset. When completing the journal entry, Wagner Enterprises included a debit to Cash, but Stone Services did not. Why would the companies have this difference in the journal entry?

Wagner sold their asset, whereas Stone retired their asset.

A ________ reports both the gross amount of receivables and the allowance for doubtful accounts.

balance sheet

Where should both the gross amount of receivables and the allowance for doubtful accounts be reported?

balance sheet

Why is it wise to segregate duties related to accounts receivable and cash handling?

because allowing an accounts receivable clerk to handle both increases opportunities for fraud

A creditor is investigating the liquidity of four companies. Based on their liquidity, which company is the creditor MOST likely to extend credit to?

a company with current assets of $268 million and current liabilities of $94 million

What do liquidity ratios measure?

a company's short-term debt paying ability

________ risk is a threat of nonpayment from a single large customer that could adversely affect the financial health of a company.

a concentration of credit

If a company is experiencing a threat of nonpayment from a single large customer that could threaten the financial health of the company, the company has

a concentration of credit risk

An advantage of ________ as compared to ________ is that it gives the lender formal proof of the obligation if necessary to collect the debt.

a note payable; accounts payable

________ a plant asset that increase its operating efficiency, productive capacity, or expected useful life are generally debited to the asset affected.

additions and improvements to

The cost of a plant asset is equal to the ________ when it is purchased for cash.

amount of cash paid

Intelligent Industries recently purchased a $50,000, 10% 12-month bond. From Intelligent's point of view, this bond would be considered a

current asset, because it represents a resource that can easily be converted to cash within one year.

From a liquidity standpoint, which is more desirable for a company to have?

current assets exceed current liabilities

When preparing the current liabilities section of the balance sheet, companies should include all

current maturities of long-term debt.

Additions and improvements to a plant asset that increase the asset's operating efficiency, productive capacity, or expected useful life are generally

debited to the plant asset affected.

When disposal of a plant asset occurs during the year, ________ is recorded for the fraction of the year to the date of the disposal.

depreciation

A note that is not paid in full at its maturity is called a ________ note

dishonored

Which depreciation method generally results in the lowest net income for the first year a plant asset is utilized?

double declining-balance

Fultz Home Furnishings is considering issuing stocks or bonds to raise money to purchase a new manufacturing facility. If they want to issue securities in small denominations, which type of security should they choose?

either stocks or bonds

Which of the following are ways that plant assets can be disposed of?

exchange

Moss Company initially records its short-term notes receivable at ________. This amount will be adjusted by ________ at fiscal year-end.

face value; the allowance for doubtful accounts.

Leonard Company uses and discloses different depreciation methods for the major classes of property, plant, and equipment. Which accounting principle is Leonard Company addressing?

full-disclosure principle

A $200,000 bond was retired at 102 when the carrying value of the bond was $209,000. The entry to record the retirement would include a ________ on bond redemption of

gain; $5,000.

Because of their ________, Gibson Company lists short-term investments ________ short-term receivables on a classified balance sheet.

greater liquidity; before

How does a sale of receivables impact a company's operating cycle?

it shortens the operating cycle

What is the maturity date of a 60-day note receivable issued on November 17th, 2021?

january 16th, 2022

The service potential of ________ does not decline over its useful life.

land

Depreciable cost is the cost of an asset

less its salvage value.

Failure to record an accrued expense means failure to record a(n)

liability

If a company wants to arrange an agreement with a lender that allows them to borrow up to an agreed-upon amount, they should arrange a(n)

line of credit.

Evaluating the ________ of receivables is one of the five steps in sound management of accounts receivable.

liquidity

Continental Manufacturing is selling a large piece of production equipment with a book value of $15,000. If Continental's proceeds on the sale are $12,000, then the company should record a

loss of $3,000 in the "Other expenses and losses" section of its income statement.

Which of the following are principles of sound accounts receivable management?

monitor collections

When a company purchases land, which of the following costs is included in the purchase price?

net removal cost of an old building

Assessing a company's debt obligations can help determine if the company can

obtain debt financing in order to expand.

An intentional effort by a company to structure its financing arrangements to avoid showing liabilities on its balance sheet is called ________ financing.

off-balance-sheet

The debt to assets ratio will generally increase when a company adjusts the ratio for

off-balance-sheet financing.

Under which of the following circumstances would a company tighten its credit and collection policies?

when the average collection period is increasing